Xerox Holdings Corporation / Xerox Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless noted, the financial results below are for Xerox Corporation and its consolidated subsidiaries. Xerox Holdings Corporation’s holding-company reorganization was completed July 31, after quarter-end; the filing’s June 30 statements reflect the pre-reorganization structure.
Business context and financial performance
Xerox sells printing equipment and supplies and provides maintenance, services, rentals and customer financing. Management described continuing pressure from lower print volumes, competitive pricing, a shrinking installed device base and organizational changes under its Project Own It transformation.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.289 billion | $2.510 billion | $4.495 billion | $4.945 billion |
| Revenue change | Down 8.8% | — | Down 9.1% | — |
| Net income attributable to Xerox | $181 million | $112 million | $314 million | $135 million |
| Diluted EPS | $0.77 | $0.42 | $1.32 | $0.50 |
| Adjusted net income attributable to Xerox | $233 million | $213 million | $452 million | $391 million |
| Adjusted diluted EPS | $0.99 | $0.80 | $1.90 | $1.48 |
| Gross margin | 39.2% | 39.9% | 39.7% | 39.9% |
| Pre-tax income margin | 8.7% | 5.3% | 6.3% | 5.4% |
| Adjusted operating margin | 12.7% | 11.0% | 12.0% | 10.5% |
| Cash provided by operating activities | $313 million | $235 million | $539 million | $451 million |
Adjusted measures are non-GAAP and exclude specified restructuring and related costs, intangible amortization, transaction costs and non-service retirement-related costs, among other items in certain periods. They should be considered alongside, not instead of, GAAP results.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $712 million; cash, cash equivalents and restricted cash totaled $776 million, compared with $1.148 billion at December 31, 2018.
- Reported debt was $4.828 billion, down from $5.230 billion at year-end. Xerox repaid approximately $406 million of maturing Senior Notes during Q1; it had no borrowings under its credit facility at June 30.
- Six-month investing cash outflow was $72 million, including $42 million for acquisitions and $31 million of capital expenditures. Financing cash outflow was $846 million, including debt repayment, $300 million of share repurchases and $122 million of dividends.
- Management expected 2019 operating cash flow of $1.15–$1.25 billion, capital expenditures of about $150 million, dividends of about $250 million and share repurchases of at least $600 million.
Material changes and management commentary
- Q2 revenue declined 8.8% year over year, including a 1.6 percentage-point unfavorable currency impact. Equipment sales fell 10.2%; post-sale revenue fell 8.4%. For the first half, total revenue declined 9.1%, including a 2.0-point currency impact.
- Management attributed lower revenue to reduced page volumes, price competition, fewer devices in the field, lower equipment sales and temporary disruption from changes to North American sales coverage. Equipment gross margin fell to 28.8% in Q2 from 32.0%; total gross margin fell 0.7 percentage points.
- Cost reductions and productivity actions lowered selling, administrative and general expense by $105 million in Q2 and $185 million in the first half. Management said those benefits more than offset the revenue decline in adjusted operating profit, while warning that transformation-related disruption continued to affect sales.
- Q2 GAAP net income rose $69 million year over year, primarily reflecting lower transaction-related costs and higher equity income from affiliates. The first-half improvement also reflected a $35 million tax benefit from finalization of Tax Act repatriation-tax regulations and improved equity income, including at Fuji Xerox.
- First-half restructuring and related costs were $149 million, including $72 million of restructuring and asset-impairment charges. The filing reports about 4,500 fewer employees since December 31, 2018, including transfers associated with outsourcing.
Guidance, risks and contingencies
- Outlook: Xerox revised its 2019 revenue outlook to an approximately 6% decline, excluding an expected 1.0 percentage-point unfavorable currency impact, from its prior expectation of an approximately 5% decline. Management expected transformation-related sales effects to moderate in the second half, but said savings could be partly offset until initiatives are fully implemented and stabilized.
- HCL shared services: The arrangement covers selected administrative and support functions, with transition expected to take up to 18 months and an aggregate spending commitment of about $1.3 billion over seven years. Termination is permitted subject to declining fees or for cause; employee-transfer requirements may delay expected savings.
- Potential financing-business transaction: Xerox was exploring strategic options involving its customer-financing business and/or related assets. No decision or commitment had been made, and a transaction was not assured.
- Litigation: Fujifilm sought damages exceeding $1 billion, punitive damages and a claimed $183 million termination fee in litigation concerning the abandoned Fuji transaction. Xerox said it would vigorously defend the case and that loss probability was premature to assess. Other shareholder litigation also remained pending.
- Brazil tax matters: Unreserved tax contingencies were $465 million at June 30; management said most were assessed as remote, and it did not expect the matters, based on counsel’s advice and existing reserves, to materially affect results. Restricted cash included $64 million, primarily litigation deposits in Brazil.
- Other risks: The filing identifies ongoing exposure to secular printing-market changes, competition and pricing, execution of cost actions, currency and interest rates, pensions, cybersecurity, regulatory matters and litigation. Actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- Whether revenue declines, particularly in post-sale activity and mid-range equipment, moderate as sales-organization changes progress.
- Whether cost savings translate into sustained operating cash flow and margins without continued pressure on equipment profitability.
- Progress against the revised revenue outlook and cash-flow, capital-spending, dividend and repurchase expectations.
- Any developments in the proposed customer-financing transaction, HCL transition costs and expected savings.
- Updates on the Fujifilm dispute, shareholder cases and Brazil contingencies, including any change in expected exposure or required cash security.
- The effects of the July 31 holding-company reorganization and related financing and guarantee arrangements; the filing reports no change to business operations from the reorganization.